Don't Fight the Fed
The news is often brimming with debates about whether the Fed is making good or bad decisions for our economy. And the last few weeks have been no exception. So, what is the Fed...and how does the Fed impact home loan rates? Read on for details.
What is the Fed?
The Federal Reserve System (known informally as the Fed) is our central banking system, and it was given the responsibility of setting our monetary policy by the Federal Reserve Act of 1913.
The Fed is composed of the Federal Open Market Committee (FOMC), the presidentially appointed Board of Governors, twelve regional Federal Reserve Banks, numerous privately owned U.S. member banks, and various advisory councils. Among these various components, the FOMC is responsible for setting monetary policy. The committee consists of twelve members at any given time: the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
Each year, the FOMC holds eight regularly scheduled meetings, and additional meetings as needed. During these meetings, the FOMC reviews the current state of our economy and makes decisions about monetary policy givens its long-term goals of economic growth and price stability. At the end of each meeting, like the meeting held last month on March 13th, the Fed releases its Policy Statement which outlines the decisions it made.
What was significant about the FOMC's most recent Policy Statement?
The Policy Statement that was released after the March 13th meeting was not a glowing endorsement of the economy. But the Fed did admit that things are improving in most areas except housing, which remains "depressed." While improvement in our economy is good and should this trend continue home loan rates could edge higher. Why? Because Stocks often benefit in strong economic times at the expense of Bonds, including Mortgage Bonds, which home loan rates are based on.
In its Policy Statement, the Fed did acknowledge that inflation could increase in the near-term due to higher energy prices-and higher inflation is not good news for Bonds and home loan rates as inflation hurts the return of a fixed investment.
But perhaps the most significant news in the Policy Statement for Bonds and home loan rates was that the Fed failed to mention anything about another round of Bond buying (called Quantitative Easing or QE3). This is something that will be important to listen for after the FOMC releases their next Policy Statement on April 25th. If there is mention of QE3, this could help Bonds and home loan rates.
What's the bottom line for home loan rates?
One of the things that has helped Bonds and home loan rates reach their record best levels recently is something called a safe haven trade. At times of global unrest and uncertainty, like the ongoing debt crisis in Europe, traders park money in "safe" investments like Bonds. And since Bonds such as Mortgage Backed Securities (MBS) are tied to home loan rates, when Bond pricing improves, our home loan rates can improve.
But it's also important to understand how incredibly volatile this situation is. A "safe haven trade" is a short-term trade. Should events around the world become more stable, this safe haven trade can unwind very quickly-with Bond prices and home loan rates worsening as a result.
That's something we have seen a bit of lately, during those weeks when news on the debt crisis in Europe has quieted down. That's not to say that Bonds and home loan rates won't be seen as a safe haven for trading in the future, as the uncertainty in Europe is far from over. In addition, the issues with Israel and Iran aren't going to just disappear, and those issues may lead investors back into the safety of
Bonds in the near future.
The bottom line is that there are many factors in the markets that affect the performance of Bonds and home loan rates each day. The good news is that you don't have to decipher all the news on your own.
If you have any questions about your own situation, and how the news of the day may impact it, contact Gary Umholtz at RPM Mortgage (707) 343-9510 for a no obligation consultation.